Variable pay

(Barbados Nation) – A common phenomenon within the global business environment is the challenge to attract, motivate and retain employees. While there is no one-size-fits-all solution to this dilemma, an effective tool organizations can consider is the most tangible element of the total rewards model such as variable pay.

What is variable pay? WorldatWork, a global association for human resources management professionals, defines it as cash or its equivalent that is contingent on performance or results achieved. It can be designed for an entire organization, business unit, division, department or special team.

Variable pay programmes are also sometimes referred to as “pay for performance” or “at-risk” pay plans. It is termed “variable” because the amount actually paid will vary based on the criteria selected by the organization.

In today’s economy, fuelled by an ongoing economic slump, high unemployment and continuous pressure pertaining to loss of employee benefits, many detractors have questioned the validity of organizations implementing variable pay plans. A survey was conducted by the firm Hewitt Associates, which published a report entitled ‘Organizations Are Not Getting Full Value From Variable Pay Programmes’. The data showed that about half of organizations with single-digit revenue growth believed that the cost of their variable pay programmes outweighed any benefit that may be derived. Organizations with double-digit revenue growth, however, almost all reported positive outcomes from their variable pay programmes.

The study further found that organizations which achieve high-revenue growth tend to have successful programmes because they, in the first instance, provide the appropriate amounts of administrative and monetary support, and more crucially, were found to pay particular attention to other critical areas such as ensuring and maintaining the requisite levels of communication.

Another of the key differentials identified by the study between organizations with a positive and those with a negative experience with variable pay programmes, was the selection [and lack thereof] of appropriate performance measures. The selection of meaningful measures is a key component in the design of any variable pay plan since they communicate the objectives of the organization to the employees and are themselves motivators for those employees.

A common error most organizations make is to develop competing measures. For example, developing measures geared towards the reduction of costs and simultaneously creating measures that seek to increase sales, is an irony in itself. “If an organization wants growth, it can’t reward for cutting cost.” Cost reduction and growth can be competing rather than complementary goals so by blending the two, organizations run the risk of confusing employees and in most cases accomplish neither objective.

Other advocates of variable pay frame the issue in terms of return on investment. To minimize today’s heightened business risk, businesses must reduce their investment in fixed costs and maximize the use of variable costs, which they would incur only if they achieve certain results.

Management must determine which of the three categories of variable pay – incentives, bonuses, recognition – best suits its needs. Incentive plans can be categorized as short or long term. According to a study conducted in Barbados in 2008 by The Productivity Council, the main incentive plans present in organizations in Barbados are the Scanlon, Rucker, Improshare (improved productivity through sharing) and Profit Sharing (which are all gain sharing schemes).

Gain sharing schemes focus on specific issues that the organization sees as vital and pertinent to its business strategy. Each competency of the organization is measured on implementation of the scheme and then again after the first year. The difference between the original measure and the second measure is the gain produced by the scheme.

With regard to bonus plans, they tend to share many similarities from organization to organization. The reason behind this is that most organizations subscribe to a pay-for-performance philosophy which basically ties a bonus to two important measures: how well you are doing with respect to your manager’s expectations; and how well your organization is doing with respect to its expectations.

Bonuses also reflect the respective levels of responsibility within an organization, and in order to ensure accountability and reward for these responsibilities, organizations tie portions of employees’ pay to both individual and organizational successes.

Recognition plans are generally implemented when an organization wishes to focus on recognizing employee performance, while promoting the replication of those behaviours (as opposed to results) that would support company objectives.

In contrast to incentives and bonus plans, recognition plans acknowledge employee contributions after the fact, usually without predetermined goals or performance levels that the employee is expected to achieve. However, whichever plan is chosen it should support the business objectives and be driven by business strategy. The ultimate goal of variable pay is to improve organizational performance.

Focus – identifies what is important to employees and the organization by establishing measures and objectives.